Pages

Wednesday, June 1, 2016

The Power of Negative Thinking

I know…. even the title sounds
absurd. The advantages of thinking positively have been drilled into our heads ever
so often and so forcefully since our younger days that even the notion that
negative thinking could be advantageous sounds absurd. Well, read on dear
readers. I don’t intend to, because I know I can’t change your views on this
matter just by a few paragraphs, but I hope by the end of this read, you might
agree that the concept of negative thinking being advantageous is not as absurd
as it might initially sound. Of course, this being a financial blog, we are
going to apply this principle to financial markets, but I am sure you will soon
realize, that it’s equally applicable and helpful when it comes to life itself.

In the past three or so decades,
the world has seen at least six financial crisis worth their name, namely
savings and loans crisis of the 80s, Asian financial crisis of 1997, collapse
of Long Term Capital Management and Russian financial crisis of 1998, the
continuing Japanese financial crisis, dot com bubble and of course, the Big One.
Wait, that actually makes it seven. My bad. And you know what dear readers.
Each crisis was preceded by “This time it is different”. Sounds familiar,
doesn’t it? And I don’t know where the markets will end up tomorrow, let alone
where they will be at the end of the year, but I can promise you that there
will be at least two instances of markets falling more than 50 percent in the
next 50 years i.e. you can be sure that there will be at least two instances of
markets falling 50 percent or more during our investment lifetimes. And this
will continue as long we humans are governed by fear and greed. So basically,
forever.

Imagine being 5 years away from
retirement and losing half of all you are worth, what you have spent your
entire adult life working so hard for just disappearing. Think it can’t happen?
Just ask the Bernie Madoff victims and many of them would say if only they were
so lucky to lose only half their networth. “Well, that was them. That’s never
going to happen to me. I am smarter than that.” OK if you say so. Stay
positive. But remember the last paragraph dear readers. “This time its
different”. The only problem is that it never is.

And this is exactly where
negative thinking comes in. Don’t know how to think negatively? Trust me its
easy. Just follow these steps. Firstly, accept it. Accept that markets are not
in your control. Accept that the markets will go down. Accept you will lose
your hard earned money. There is nothing you can do about it. It has always
happened and you are no different. Sorry to disappoint you. I know your mother
always said that you are special, but the markets really don’t care. Come to
think about it, this is rather like the first step of the AA program, isn’t it?

Let’s move on to step 2 then. Take
it to the next level. Imagine the worst-case scenario. Imagine the market HAS
fallen down 50%. How much money do you stand to lose? Put an absolute number on
it. How will this affect your lifestyle? Will you be able to pay the next month’s
mortgage? Will you be able to pay your child’s tuition? What about that
vacation that you have been planning and saving for for years? Still going to
be able to make it? Most importantly, will you be able to sleep at night?
Pardon me if all this sounds too dark and gloomy. But your not thinking about
them is not going to stop these things from happening.

And the thoughts presented herein
are nothing new. The ancient Stoics knew the power of and practiced negative
thinking thousands of years ago. In fact, they went a step further. Don’t just
think about step 2. Practice it! Scared about losing half your net worth? Think
that you are in an over paid job and scared that you might lose it and be
forced to take on a lesser paying job? Well, spend fifteen days living a frugal
lifestyle and face your fears. Not only just face, but rather live your fears!
Embrace them instead of thinking “this can’t happen to me”. Be negative!

Living your fears can result in
two scenarios. Scenario one, you live through your worst-case scenario and
realize that things were actually not that bad as you imagined them to be. To
quote Seneca, a prominent Stoic, “we suffer more often in imagination that in
reality”. And just as an interesting fact, he wrote this way back in 65 A.D. So
much for this time being different. Negative thinking exhorts us to live our
fears, rather than spend a lifetime running away from them. We spend our
lifetimes building bridges of fears and worries that we are never going to
cross.

Scenario no 2. You lived your
worst-case scenario and you turned out to be right! Your fears were totally
justified! You absolutely hated it. Never again! Turning again to Seneca. “He
robs present ills of their power who has perceived their coming beforehand”.
Negative thinking, if nothing else, at least allows you to be prepared and does
not allow you to be caught unawares. Also, the fact that your fears turned out
to be as bad as you had imagined them to be, will force you to be all the more
careful in your dealings. If you realize that you cannot afford a 50% fall in
the market, you will now be more active in diversifying your portfolio.
Remember, the key is not in thinking that all is well and market cannot fall
50% (positive thinking), but in thinking that it definitely will fall 50%
(negative thinking). Maybe you will finally get down to saving for that rainy
day portfolio that you have thought of maintaining for years now but never
really got down to. Maybe that new car or Apple gadget will not come in its way
now.

So, either Scenario one or two,
it’s a win-win situation. And there is an added benefit that we haven’t even
touched upon yet! Whether its Scenario one or two, you come out on the other
side having greater appreciation and attaching greater value to what you
already have! If “you don’t know what you got until you lose it” is true, then
practice losing it!

I just now googled “negative
thinking” and the first link I got is “Negative Thinking and How to Overcome
It”. I hope you readers are now not so negative about negative thinking. Make
no mistake dear readers; negative thinking is not the same as pessimism. I am a
firm believer that we who are living in today’s day and age have it better than
any other generation in the history of mankind. And I believe even more
strongly that our future generations will be a lot better off than we are
today. I like to think of myself as a rational optimist. You cannot not be an
optimist in order to invest in stocks for the long run! But I hope you readers
will agree with me; a little bit of negative thinking now and then doesn’t hurt
matters too!

Privacy Policy

Follow by Email

DISCLAIMER

Welcome to my blog! This blog discusses my experiences with trading. This blog is for entertainment and educational purposes only. The trades and ideas discussed here are my opinions. None of the ideas and opinions shared in this blog are recommendations to buy and sell any stock and you are responsible for your own trades. The author is not an investment advisor.